Ok computer: Why the record industry is terrified of Radiohead's new album

Radiohead are the latest – and greatest – band to shun the conventional CD release. Their new album is available online – and you don't have to pay for it

Ever since a cadre of politicised hippies tore down the fence at the 1970 Isle of Wight Festival, the more anarchically inclined of rock fans have demanded that "music be free", contending that pop's position under the entertainment industry umbrella fatally compromises its aesthetic and political freedom. Now, as Radiohead offer their album In Rainbows to the world potentially for as little as a penny apiece, that revolutionary ambition is upon us.

Ironically, it has been triggered not by penniless hippies in some inner-city squat, nor by indie-label firebrands, but by one of the biggest bands in the world, whose rise occurred under the stewardship of EMI, the UK's bastion of corporate entertainment for over three-quarters of a century. And piling irony upon irony, far from having their aesthetic and political freedom compromised by the relationship, Radiohead have actually grown more artistically adventurous with each successive album, and remain one of the industry's most politically engaged acts.

Under the new set-up, fans will be offered the chance to buy the band's album for whatever they deem appropriate. Most will pay between £1 and £5, which seems reasonable. Those desperate for a more physical artefact are offered a high-quality vinyl double-album package with lavish artwork and an extra CD of otherwise unavailable tracks, for £40 – and even at that price, the band will sell shedloads. The CD version of the downloads, it's reported, will creep out sometime next year.

The move has been widely viewed as the inevitable corollary of the rise of digital downloading, which in less than a decade has all but demolished the old retail sector. It's shocking to consider that Napster, the website that established the notion of free access to music via file-sharing, was only started in 1999; but by 2001, it had a worldwide user base of more than 26 million fans, all looting whatever music they could find. The mainstream industry, unable or unwilling to see beyond the hardware forms – vinyl, CD, cassette – that were the backbone of their business, was blind-sided by the file-sharing boom, and instead of seeking some form of accommodation with downloaders, initially reacted by trying to criminalise them: acts such as Metallica and Dr Dre instigated legal action against Napster in 2000, and the following year A&M Records sought an injunction preventing its copyrighted recordings from being offered via the website.

The RIAA (Recording Industry Association of America) began sueing individual alleged file-sharers, an aggressive policy that backfired somewhat when the organisation appeared to be bullying victims including a 12-year-old girl, a 66-year-old woman allegedly downloading gangsta-rap, and, in 2005, a woman who had died the previous year, aged 83. To date, they have instigated over 20,000 cases.

But not everyone believed Napster was entirely damaging to a record's sales potential. Some felt the opposite was true in many cases – that the exposure afforded by file-sharing could stimulate sales. This was proven in 2000 when tracks from Radiohead's Kid A appeared on Napster three months before the album's official release. An unflinchingly experimental album, significantly different in style from OK Computer and featuring no obvious singles, it was a challenging work, yet despite the millions of free downloads, it still became the band's first American chart-topper. Previously, their best placing had been the lowly 21 achieved by OK Computer. Clearly, Napster had not harmed its prospects, and it could be be argued to have provided invaluable promotional assistance.

The industry came to realise that the larger war was lost and started developing relationships with "legal" download services such as Apple's iTunes, belatedly tapping into the revenue stream facilitated by the popularity of the iPod. The effect on retailers, however, has been catastrophic. The big chains, such as Virgin, struck deals allowing them to sell CDs at a more competitive price, but the smaller-volume operators – the independent shops that sustained the indie fringe – have been unable to compete and are disappearing. Record labels, meanwhile, are struggling to find a new role within the industry, with many forced into the current, seemingly endless, round of mergers.

Radiohead are not the only act to embark on this strategy – their announcement was followed by a similar offer from Alan McGee on behalf of The Charlatans' next album – but they are the biggest. In recent years, however, their sales have declined; after Kid A, the Amnesiac and Hail to the Thief albums could only manage gold certification in America, which has led some to speculate that the new strategy may be a means for the band to compensate for declining popularity by keeping a larger proportion – indeed, 100 per cent – of sales revenue, rather than the small share previously offered by Parlophone.

The band, originally called On A Friday, signed a six-album deal with Parlophone in 1991 after a chance meeting between the label's Keith Wozencroft and guitarist Jonny Greenwood in the Oxford record shop where the latter worked. They changed their name to Radiohead (after a track on Talking Heads' True Stories) and began recording their debut album Pablo Honey. Their first single, "Creep", a V C double-edged exercise in ironic self-deprecation, reflected the band's admiration of the Pixies, but was poorly received on its first release; Radio 1 considered it "too depressing" to play. But the song built a following in America, where its smouldering dynamic and cathartic chorus slotted neatly into the prevailing grunge aesthetic. It remains their biggest hit, and helped hoist Pablo Honey to a respectable chart position, just outside the Top 30.

But as their American promotional tour stretched into its second year, the band grew bored with playing the songs they had written years before and almost broke up. Keen to distance themselves from "Creep", their follow-up album The Bends featured the kind of artistic volte-face that sends chills down label bosses' spines, with the band re-establishing themselves as an arena-rock outfit with the ability to inject powerful emotional content into complex musical structures. "When The Bends came out," drummer Phil Selway later said, "everyone went on about how uncommercial it was. Twelve months later, it was hailed as a pop classic. The record company were worried there wasn't a single on it, and we ended up with five Top 30 hits from it."

The Bends might have scared their label, but its unprecedented blend of melodic prog-rock and soul would serve as the template for an generation of lesser talents, most notably Coldplay. Their stature was also rising among their peers, with REM's Michael Stipe – whose idealism and idiosyncratic appearance made him an obvious role model for singer Thom Yorke – admitting that he was scared by how good they were. "Thom Yorke, with 'My Iron Lung', that's just an amazing metaphor to put into a song," Stipe gushed to me in 2001. "Stuff like that just makes me want to work harder and write another song that's as good as that."

The reception accorded OK Computer in 1997 suggested that Stipe's admiration was shared by millions, as this complex work became their most popular album. Yorke admitted he was surprised at the reception, saying: "What really blew my head off was the fact that people got all the things, all the textures and the sounds and the atmospheres we were trying to create." The subsequent world tour was filmed for a fly-on-the-wall documentary, Meeting People is Easy, a film that revealed the band's growing distaste for the music business as they laboured through a gruelling year of concerts. In the year after the tour's conclusion, their only public appearances would be at a couple of benefit concerts for Amnesty International and the Tibetan Freedom Movement, indications of the growing political engagement of Yorke.

Since then, Yorke has used his rock-star profile to bring Good Causes to his fans' attention, advising them to read books such as Naomi Klein's anti-corporate tract No Logo and Alastair McIntosh's Soil and Soul: People Versus Corporate Power, an account of the author's campaigns to prevent industrial despoliation of Scotland's Western Isles. More recently, the singer has bitten the bullet avoided by most stadium-rockers, and criticised the "ridiculous" amount of energy needed to fuel large-scale concert events – even threatening to cease touring the more far-flung destinations unless steps were taken to reduce carbon emissions.

After OK Computer, Radiohead came close to splitting up. Yorke suffered severe depression, which led to writer's block, and the members' different ideas as to their future direction seemed to presage solo careers. But again they reinvented themselves, turning from guitar-based rock and creating music heavily influenced by jazz, electronics and the avant-garde. The sessions furnished two of the most unusual albums ever to top the album charts, 2000's Kid A and, a year later, Amnesiac. Sales were understandably lower than those of OK Computer, but the return of their familiar, crowd-pleasing guitar-rock style alongside the more recent electronic passages and experimental developments on 2003's Hail to the Thief restored a certain equilibrium to their progress.

Hail to the Thief was the final album delivered under Radiohead's original Parlophone contract, and more cynical observers saw its restoration of relative sonic normalcy as an attempt to bolster the band's commercial appeal to suitors, which for a gold-chip act like Radiohead would include virtually every major label. But as the years passed, no deal was done. The band was clearly in no hurry to get into bed with the corporate world again, as Yorke and Greenwood took time out to make solo albums. Then, suddenly, the announcement that In Rainbows would be sold directly by the band, cutting out the various middlemen and the cosy industry practices weighted so heavily in the labels' favour. And one can only imagine the trauma wrought in record-label boardrooms by their decision to charge whatever purchasers deemed appropriate.

Radiohead's decision is only the latest, if the most damaging, nail in the coffin of the mainstream music business. Not that the labels' clients will be wasting their tears; for decades, artists have complained about the inequity of contracts, with their inbuilt skimming of 10 per cent to cover "returns" of damaged copies (even on supposedly indestructible CDs), and the way that instead of receiving the same percentage of revenue from the higher-priced CD as from vinyl, artists were routinely offered the same sum. And for decades, all but the most powerful artists were unable to do anything about it. At the other end of the scale, naive young bands who accepted huge advances would discover, when they were less successful than expected, that they were heavily in debt to their label and prevented from releasing material elsewhere until it was paid off.

A spendthrift, short-term culture prevailed at many labels, in which vast sums were expended promoting singles acts who would never recoup it in album sales, while longer-term prospects were deprived of the support that might help their careers blossom. Back in the Sixties, even a lower-division journeyman rock band like Budgie got to make a handful of albums before they were dumped; by the Nineties, successful indie acts with hit singles were being cut adrift prematurely, often because label bosses were "slimming down" the artist roster to just a few stars and steady sellers to make their company more attractive to potential purchasers.

It was a climate that bred waves of artist disaffection. When the likes of Prince and George Michael declared themselves little more than "slaves", the general reaction was one of incredulity; but if stars of that magnitude felt hard done by, just imagine how demoralised and crushed the ranks of lesser earners must have felt. And when artists such as Bob Dylan, Paul McCartney and most recently Joni Mitchell would rather do business with a company like Starbucks than with the established labels, something is drastically rotten in the state of Denmark Street.

Digital downloading has turned the entire industry on its head. Facing sharp falls in album sales, established acts have re-thought their approach. Until recently, a band would tour primarily to encourage sales of their album. Now, the Stones, for instance, make vastly more money out of concert tickets and merchandising than from record sales. For Prince, it's well worth giving away his new album to promote his profitable run of shows at the O2 Centre.

But Radiohead's decision to, in effect, give away their album hoists the whole issue on to a much higher level, prompting a slew of thus-far-unanswerable questions. Such as: won't fans expect to get all music for free, even that made by penniless acts? How does a small act establish and develop itself, without sales income or label assistance? Indeed, why bother making records at all, when the promotional effect on club gigs results in such low returns? What happens to the staff laid off when record shops close? And doesn't this simply establish a new class division, between those who are able to own and operate computers and those who are denied access – how do they get to enjoy In Rainbows?

I've no idea but, for the moment at least, the pay-what-you-like strategy affords punters the opportunity to make sharp critical assessments where they really hurt: right there in the musicians' pockets. So: shrewd or stupid? You be the judge.

'In Rainbows' is available on 10 October on www.radiohead.com